Question

Read the case: Netflix Inc.: The Second Act - Moving into Streaming and complete your case analysis.

Discuss the following:

1) briefly summarize the key marketing strategy issues in the case that are still relevant TODAY in addition to contemporary issues you find via research;

2) make thorough recommendations on how the issues should be handled;

3) provide a justification for the recommendations.

Case write-ups should be 3-5 pages, double spaced, 12 font size in Times New Roman.

The case analysis should be approached as if you are a marketing manager that has been asked to present three long-term strategies to the board of directors of the brand/product in question. Based on your understanding of the case AND external research on the CURRENT situation, what are the three best strategies to revitalize this brand/product to the same target market and/or alternative markets? Please do not limit yourself to the specifics of the case when formulating your strategies. Think ‘BIG PICTURE’ (internal/external factors, complementary products/industries, sustainability, etc.).

Strategic recommendations should be measurable and broad enough to encompass the direction of the brand for at least 5 years. At the same time, the analysis should explain in detail the logic and process behind implementing such initiatives.

NETFLIX INC.: THE SECOND ACT — MOVING INTO STREAMING

Netflix Inc. (Netflix), a subscription-based movie and television (TV) show rental service, offered content to its subscribers either via DVDs delivered by mail or through Internet-based streaming. Netflix’s 2011 third-quarter financial reports confirmed some widely anticipated negative news. Netflix, which depended on perpetually increasing its subscription base, had lost 800,000 customers.2 While this loss represented only 3.4 per cent of its 24 million patrons, the company had never suffered a decrease in its customer base (see Exhibit 1). Alarmingly, this contraction resulted in a near 9 per cent hit to the company’s earnings-pershare, which dropped to US$1.163 per share from $1.27 per share in the previous quarter.4 This situation was compounded by the fact that it was not caused by market trends or the slumping world economy, but by Netflix itself. In July, just three months prior, Netflix had increased customers’ subscription fees by 60 per cent. Netflix was at a crossroad; the path it chose could affect its future. Should it return to combining the two services or continue with two separate services and live with the consequences? While the price increase seemed extreme, Netflix faced rising costs, particularly in acquiring content. Netflix’s second change, made several weeks earlier, in September, was to split its DVD mail-order service (renamed Qwikster) and streaming video service (remaining as Netflix). Reed Hastings, Netflix’s chief executive officer, stated, “Streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, [and] different benefits that needed to be marketed differently, and we needed to let each grow and operate independently.”5 Netflix needed to differentiate the two services, ensuring that each had the latitude to rightfully respond to customers’ changing desires.

  Irrespective of the company’s rationale, the aforementioned changes were met with public disdain and a mutiny of sorts. Forced to pay exorbitantly more and to work twice as hard to manage their online profiles, many Netflix customers, some once very loyal, cancelled their subscriptions. Netflix’s stock price plummeted by nearly 77 per cent in four months,6 indicating widespread displeasure. Nearly every mass media outlet chastised Netflix’s decisions, calling them outrageous. Full blame was placed on Hastings himself, whom many not only defamed but also bludgeoned verbally. Once the darling of the business world for guiding Netflix’s ascension to market domination, Hastings’s qualifications were now called into question. Both he, and the company he had incepted, had incurred losses to their once-celebrated reputation. The demise of DVDs would soon give way to streaming technology. Netflix’s commitment to this new reality was obvious: by 2011, it commanded a market share of 61 per cent in movies that were either streamed over the Internet or offered on-demand through a cable or satellite TV service. Comcast was next with 8 per cent, followed by other services, such as Direct TV and Apple TV, at 4 per cent or lower. Netflix faced stiff competition from other entities that had both the desire and capability to capture a share of the streaming market. Additionally, the acquisition of content was becoming ever more difficult as the production companies were employing licensing policies that were becoming more stringent and costly. This situation starkly contrasted Netflix’s cost of acquiring DVDs, particularly movies that were not the most recent releases (see Exhibit 2), as was Netflix’s practice. These different economies had an impact on Netflix’s cash flow, which was only around $356 million (cash on hand) in the final quarter of 2011, compared with more than $76 billion for Apple. Effectively adapting to these and other stark contemporary realities was tantamount to Netflix’s continued success. Unfortunately, the changes Netflix thought were necessary caused nothing but turmoil. NETFLIX: EMERGENCE TO MARKET DOMINATION Netflix delivered movie and TV shows via Internet streaming and U.S. mail (for DVDs) for a monthly subscription. Starting at $7.99 per month, subscribers could instantly watch an unlimited number of TV episodes and movies by streaming the shows over the Internet to their computer or TV. Customers could connect with their Netflix account through their Nintendo Wii, Sony PlayStation 3, Xbox 360, iPad, iPhone, and many other devices, to instantly watch programs and movies. Netflix also offered unlimited DVD rentals and no fees of any kind. Netflix was the first company of its kind. Capitalizing on the white space, Netflix had dominated the industry, with 23.6 million subscribers as of April 2011. Netflix was founded in Los Gatos, California, in August 1997, by entrepreneurs Reed Hastings and Mark Randolph. Hastings, a former high school math teacher and software developer, started the company with $2.5 million after selling his software company. Randolph had founded the computer mail-order company, MicroWarehouse, and his resulting expertise was valuable to Netflix. Randolph was also the vice-president of marketing for Borland International. The fast adoption of DVD players was fortuitous for Netflix. The lightweight DVDs made it possible to use the U.S. Postal Service to deliver a DVD with a single first-class stamp. Netflix tested more than 200 mailing packages before discovering that it could effectively ship the product in a single package.

Growth Progression In December 1998, Netflix formed a partnership with Amazon.com Inc. The Netflix website directed customers interested in buying DVDs to Amazon.com, which in turn promoted Netflix on its high-traffic site. Despite Netflix’s popularity, in FY1999, the company reported losses of $29.8 million on revenues of only $5 million. In February 2000, Netflix developed CineMatch, a personalized recommendation system that compared customers’ rental patterns, looked for similarities, then used this information to recommend titles to people with similar profiles. (The algorithms driving CineMatch were continually updated. Recently, Netflix had offered $1 million for the person who developed the best new algorithm for CineMatch, which led to a 10 per cent increase in CineMatch’s recommendation ability.) In its first few years, Netflix incurred substantial losses, but its stated future goal was to move beyond DVD rentals to streaming video. By February 2002, Netflix had reached its target of 500,000 subscriptions and initiated an initial public offering in May 2002, at which it sold 5.5 million shares of common stock. In 2003, Netflix posted its first profit of $6.5 million on revenues of $272 million. The company also enjoyed a rapid increase in its subscriber base, from one million in the fourth quarter of 2002, to approximately 5.6 million in 2006, and nearly 14 million in March 2010. Netflix had the advantages of an early start in its business, a strong distribution system, customer loyalty, and patents for its software programs.7 Profit Model Netflix’s profit model relied on a “virtuous cycle” — that is, the more subscribers it had, the more content it could buy; and the more content it had, the more subscribers found the service attractive. Subscriber word of mouth led to new subscribers. The following information was from the Netflix investor relations site: Our primary competitive advantage is our large and growing subscriber base, which gives us tremendous operating efficiencies and, which we believe, drives the following virtuous cycles:  More subscribers means more money to license content, which drives more subscriber growth.  More subscribers means more word of mouth from subscribers to those who are not yet subscribers, which drives more subscriber growth.  [M]ore subscribers means we could increase R&D spend to improve our user experience, [which] drives more subscriber growth.8 As long as Netflix continued to grow its subscription base, and negotiated the best possible flat-fee deals for content (versus revenue sharing), the company would remain profitable. Customer churn and subscription-based (per user) licensing fees represented the main threats to the profit engine. Customer Intimacy Through the shrewd utilization of technology, Netflix had cultivated tremendous intimacy with its customers. The company had invested heavily in its operational backbone: its website technology. Invisible  to customers, a state-of-the-art system captured mass quantities of empirical data, amalgamated the given data points, applied germane analytics, and predicted customers’ desires. This complex system enabled Netflix to tailor its website for each subscriber to a “one-of-a-kind” experience that provided recommendations, requested ratings, offered customer reviews, and created unique, customer-specific genre names. The more information subscribers provided to Netflix, the more personalized their long-term experience — and Netflix reaped tremendous benefit through customers who were motivated to remain engaged. Moreover, Netflix’s information on customer preferences and purchasing trends enabled it to better its service, and to leverage suppliers and advertisers. Finally, Netflix deliberately targeted movie aficionados who saw value in the information provided by Netflix and by other like-minded subscribers in the Netflix-facilitated chat rooms. The virtuous cycle resulted in subscriber loyalty, and Netflix cemented this loyalty by making content available (often at lower costs than blockbuster movies). New Customers Many analysts wondered whether Netflix could leverage its data-mining capabilities to create the same level of engagement with its streaming customers, many of whom had a latent demand for watching popular TV serials in one go (i.e., TV “binging”), a formula successfully adopted by TV channels such as Nickelodeon. Netflix’s primary goal had never been to offer the latest content, and it focused instead on offbeat movies favoured by movie aficionados. Many felt Netflix was trying to adopt the same formula as “rerun TV.” A CHANGING WORLD BRINGS ABOUT NEW REALITIES Technological Progression: Antiquating the DVD All technologies were inevitably eventually antiquated by newer inventions. Just as the eight-track tape gave way to the cassette tape, the cassette tape to the compact disc, and the compact disc to the MP3 player, DVDs were losing out to streaming video. Advancements in data packaging and transfer led to the migration from the old DVD technology to new streaming services. Streaming services had previously been prone to interruptions and glitches, rendering them unreliable. Extremely large files, once too big to transfer virtually, needed to be saved on physical media and shipped by mail. Now, those files could be easily transferred to a small portable computing device such as a cellphone. Streaming data was more reliable than DVDs (it did not scratch or break), could be played anywhere (via mobile devices), and was far more responsive (received in real time). For all these reasons, writer Jan Ozer noted that Streaming media usage had grown exponentially over the past few years, both for entertainment purposes and as a vehicle for organizations to market, sell, and support their products and services, as well as for internal communications and training. For many such organizations, streaming video had transitioned from a “nice to have” curiosity to a mission critical technology.9 Hastings had known full well that streaming technology would eventually take flight and ultimately bring about the demise of the DVD. In his company’s annual reports, he had bluntly stated that streaming was invariably the future of the industry. Hastings knew that, as technology advanced, those qualities that once set his company apart from its competition would become nothing more than new requirements for entry.

Answer 1

Case Analysis-Netflix Inc.The Second Act

An Overview of Netflix

Netflix offers a variety of product services to its customers. The company offers traditional DVD rental by mail, instant streaming of DVD content through home PCS, and streaming on Netflix-ready devices that could be hooked up to one’s TV. Netflix has a subscription based model, which allows customers to utilize their products/services through a per month fee rather than a pay as you go rate. Although the company offers eight different subscription packages, it derives its largest revenues from its $8.99, $13.99, and $16.99 subscription plans that include unlimited DVDs per month, 1-3 titles out at one time, plus unlimited streaming of online content.

The Netflix Strategy

Netflix’s strategy so far has been to focus on not just one or two aspects of their customer base, but to focus themselves in a number of directions in order to build upon and capitalize on a growing subscriber base. Their main strategy has been to build and maintain the most comprehensive selection of DVD titles in the industry, and they have done so by creating mutually beneficial relationships with a number of entertainment video providers. Their second main strategy has been focused on product differentiation- not only how customers receive content and consume it, but also how customers choose what to watch. Netflix’s number one competitive advantage is their unique software that takes what a customer has seen or rated, and based upon that information builds a list of suggested titles similar to ones they have just watched. While other companies like Blockbuster had begun to leak into the rent-by-mail niche category that Netflix had started, no other company had customer profiling software quite like Netflix.

1) Key Marketing Issues

Netflix would seem to be on a roll. The world’s largest online entertainment distribution business has seen its streaming revenues grow from US$1.2 billion in 2007 to $6.8 billion today. In 2015, its stock price increased more than 130 percent. More than 80 million people worldwide subscribe to its service. And in January 2016, the company announced that it had expanded to provide service in more than 130 countries. Moreover, Netflix’s original programming, such as House of Cards and Orange Is the New Black, has become hugely popular and has received critical acclaim. Earlier this spring, founder Reed Hastings told the New York Times Magazinethat Netflix was enjoying a “period of stability” — that now it knew exactly where it was going. “Our challenges are execution challenges,” he said.

In reality, however, Netflix is facing an existential strategy crisis much like the one it faced in 2007–10, when its original DVD rental business became obsolete. To be sure, Netflix is the leader of the next big thing in distributing entertainment. Just as broadcasting beat radio in the 1940s and ’50s and as cable defeated broadcasting in the 1970s and ’80s, streaming now looks poised to dominate both. Cable providers have lost several million subscribers in the last five years. Total U.S. TV viewing time fell 3 percent in 2015, with half of that decline directly attributable to Netflix and viewers’ binge-watching habits. If streaming is winning and if Netflix is the most likely winner in streaming, shouldn’t Netflix be a reliable profit generator sometime in the future, as ABC, NBC, and CBS are today in broadcast TV and Comcast is in cable? The stock price says yes. But without a big strategy change, the answer is more likely no.

The broadcast and cable businesses have enormous scale economies that produced profitable oligopolies. This is because only so many companies can build the network of local TV stations required by a national broadcaster, and very few companies can lay enough cable to operate as a countrywide cable operator. Thus a handful of broadcast networks and cable companies are all that’s left standing after years of inevitable consolidation. This gives the few remaining winners huge clout with their customers and suppliers, and makes it possible for them to charge consumers and advertisers high prices for their services relative to their cost of licensing and producing their own movies and TV shows. The high profitability of their business models is a direct result of the market power they have gained by exploiting economies of scale.

Management Worry List

• How can Netflix win back dissatisfied customers?

• What can Netflix do to aid with brand damage control?

• What does Netflix do if international operations continue to post losses?

• At what point (if there is one) should Netflix redirect capital from international operations to domestic operations?

• If international operations continue to underperform, and Netflix must expend its safety net of cash, at what point does Netflix identify and execute additional capital raising measures? How big of an impact could these measures have the stock price?

• How can Netflix efficiently and cost-effectively educate the Latin American market on streaming video?

• What can Netflix do to better secure its files and limit piracy?

• What happens to the competitive landscape if Google secures broadband rights from various television channels and movie studios?

2) Recommendations

Given that by mail renting is on the decline, Netflix should work quickly to phase out this service from its current offerings. Right now there are still companies out there willing to take on extensive DVD libraries- five or so years from now, that may not be the case and Netflix will have lost out on an opportunity to avoid a significant loss.

Netflix needs to look at restructuring and re-pricing their current subscription packages. The number of packages and their prices that the company offers are no longer relevant to demand. With more and more entrants into the market, Netflix is losing its competitive pricing advantage.

In sum, in order to remain competitive Netflix needs to restructure both its product offerings and pricing strategy. The company should be looking ahead to see what the next big thing in movie rental/streaming will be and capitalize on that, while other firms are still entering the market and developing what Netflix already has.

Partner with Multichannel Television Provider - By partnering with a multichannel television provider to offer its streaming content alongside wellknown premium channels such as HBO and Showtime, Netflix will likely be able to grow its subscriber base and help offset its churn rate. Additionally, such a move could help strengthen and broaden the Netflix band, as it would provide an additional communication channel to customers and also benefit for effects of association with premium names such as HBO.

Focus on Brand Management – Given the dissatisfaction of customers over the decision to split the business into separate by-mail and streaming units, along with an associated price increase, Netflix has some recovery work to perform to repair its brand. Attempting to brand the streaming service (i.e., Qwikster) separately dilutes the strong Netflix brand. Management must find the appropriate balance to manage two distinct operations (declining by-mail business and increasing streaming business) under one brand. Focus such branding efforts on the “ease of use” cornerstones of Netflix’s original philosophy.

Continue International Expansion (But Keep a Diligent Eye Open) – Netflix stands to gain significant competitive advantage in the international arena with its aggressive expansion plans. This advantage will come from Netflix size, related economies of scale, and early mover benefits in many international markets. The benefits from a successful international expansion outweigh the risks; however, given the costs and time required to get operationally healthy in a given foreign market, Netflix must diligently manage its efforts and control its costs and be smart and deliberate in its international growth plans.

Leverage Mobile Technology – Giving the growth of mobile hardware and software, entertainment is now mobile. Create additional value for customers by offering easy to use applications and interfaces to access Netflix across multiple mobile platforms.

3) Justification

Video Streaming is a technology that has completely changed the entertainment industry as well as consumption models among audience members. A lot has changed since that very first Real Player transmission in 1995. Since then, technology has been constantly improving, making content delivery and access easier no matter the platform trying to access it.

Netflix, Inc. is one of the best examples regarding commercial applications for Video Streaming. With millions subscribing to the service all over the world, the company has found a way to capitalize it services using it’s title stock and outsourced infrastructure.

Recently, Netflix sparked some debate around the “open internet” topic. Other companies have complained that Netflix is getting revenue by using Internet services provided by third parties. And while the discussion appears to be settled, Net Neutrality and Open Internet is now in everybody’s mind.

We have seen some repercussions appear regarding Video Streaming. Film experts fear audiences may be turning “platform agnostic” consuming content regardless the size of the screen or the image quality. Nonetheless, audiences have proven they are willing to return to cinemas if the movie is worth the price of admission.

However, content abundance has made audiences “socially autistic”. Always connected to a device and somehow always isolated from others. Apparently audiences are willing to sacrifices social experiences “offline” in sake of personalized content.

With other big players like HBO, Amazon and XBOX starting to produce their own versions of original content and streaming service the competition for audience’s attention is just starting.

Answer 2

Read the case: Netflix Inc.: The Second Act - Moving into Streaming and complete your case analysis.%0D%0A%0D%0ADiscuss the following:%0D%0A%0D%0A1) briefly summarize the key marketing strategy issues in the case that are still relevant TODAY in addition to contemporary issues you find via research;%0D%0A%0D%0A2) make thorough recommendations on how the issues should be handled;%0D%0A%0D%0A3) provide a justification for the recommendations.%0D%0A%0D%0ACase write-ups should be 3-5 pages, double spaced, 12 font size in Times New Roman.%0D%0A%0D%0AThe case analysis should be approached as if you are a marketing manager that has been asked to present three long-term strategies to the board of directors of the brand/product in question. Based on your understanding of the case AND external research on the CURRENT situation, what are the three best strategies to revitalize this brand/product to the same target market and/or alternative markets? Please do not limit yourself to the specifics of the case when formulating your strategies. Think ‘BIG PICTURE’ (internal/external factors, complementary products/industries, sustainability, etc.).%0D%0A%0D%0AStrategic recommendations should be measurable and broad enough to encompass the direction of the brand for at least 5 years. At the same time, the analysis should explain in detail the logic and process behind implementing such initiatives.%0D%0A%0D%0ANETFLIX INC.: THE SECOND ACT — MOVING INTO STREAMING%0D%0A%0D%0ANetflix Inc. (Netflix), a subscription-based movie and television (TV) show rental service, offered content to its subscribers either via DVDs delivered by mail or through Internet-based streaming. Netflix’s 2011 third-quarter financial reports confirmed some widely anticipated negative news. Netflix, which depended on perpetually increasing its subscription base, had lost 800,000 customers.2 While this loss represented only 3.4 per cent of its 24 million patrons, the company had never suffered a decrease in its customer base (see Exhibit 1). Alarmingly, this contraction resulted in a near 9 per cent hit to the company’s earnings-pershare, which dropped to US$1.163 per share from $1.27 per share in the previous quarter.4 This situation was compounded by the fact that it was not caused by market trends or the slumping world economy, but by Netflix itself. In July, just three months prior, Netflix had increased customers’ subscription fees by 60 per cent. Netflix was at a crossroad; the path it chose could affect its future. Should it return to combining the two services or continue with two separate services and live with the consequences? While the price increase seemed extreme, Netflix faced rising costs, particularly in acquiring content. Netflix’s second change, made several weeks earlier, in September, was to split its DVD mail-order service (renamed Qwikster) and streaming video service (remaining as Netflix). Reed Hastings, Netflix’s chief executive officer, stated, “Streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, [and] different benefits that needed to be marketed differently, and we needed to let each grow and operate independently.”5 Netflix needed to differentiate the two services, ensuring that each had the latitude to rightfully respond to customers’ changing desires.%0D%0A%0D%0A  Irrespective of the company’s rationale, the aforementioned changes were met with public disdain and a mutiny of sorts. Forced to pay exorbitantly more and to work twice as hard to manage their online profiles, many Netflix customers, some once very loyal, cancelled their subscriptions. Netflix’s stock price plummeted by nearly 77 per cent in four months,6 indicating widespread displeasure. Nearly every mass media outlet chastised Netflix’s decisions, calling them outrageous. Full blame was placed on Hastings himself, whom many not only defamed but also bludgeoned verbally. Once the darling of the business world for guiding Netflix’s ascension to market domination, Hastings’s qualifications were now called into question. Both he, and the company he had incepted, had incurred losses to their once-celebrated reputation. The demise of DVDs would soon give way to streaming technology. Netflix’s commitment to this new reality was obvious: by 2011, it commanded a market share of 61 per cent in movies that were either streamed over the Internet or offered on-demand through a cable or satellite TV service. Comcast was next with 8 per cent, followed by other services, such as Direct TV and Apple TV, at 4 per cent or lower. Netflix faced stiff competition from other entities that had both the desire and capability to capture a share of the streaming market. Additionally, the acquisition of content was becoming ever more difficult as the production companies were employing licensing policies that were becoming more stringent and costly. This situation starkly contrasted Netflix’s cost of acquiring DVDs, particularly movies that were not the most recent releases (see Exhibit 2), as was Netflix’s practice. These different economies had an impact on Netflix’s cash flow, which was only around $356 million (cash on hand) in the final quarter of 2011, compared with more than $76 billion for Apple. Effectively adapting to these and other stark contemporary realities was tantamount to Netflix’s continued success. Unfortunately, the changes Netflix thought were necessary caused nothing but turmoil. NETFLIX: EMERGENCE TO MARKET DOMINATION Netflix delivered movie and TV shows via Internet streaming and U.S. mail (for DVDs) for a monthly subscription. Starting at $7.99 per month, subscribers could instantly watch an unlimited number of TV episodes and movies by streaming the shows over the Internet to their computer or TV. Customers could connect with their Netflix account through their Nintendo Wii, Sony PlayStation 3, Xbox 360, iPad, iPhone, and many other devices, to instantly watch programs and movies. Netflix also offered unlimited DVD rentals and no fees of any kind. Netflix was the first company of its kind. Capitalizing on the white space, Netflix had dominated the industry, with 23.6 million subscribers as of April 2011. Netflix was founded in Los Gatos, California, in August 1997, by entrepreneurs Reed Hastings and Mark Randolph. Hastings, a former high school math teacher and software developer, started the company with $2.5 million after selling his software company. Randolph had founded the computer mail-order company, MicroWarehouse, and his resulting expertise was valuable to Netflix. Randolph was also the vice-president of marketing for Borland International. The fast adoption of DVD players was fortuitous for Netflix. The lightweight DVDs made it possible to use the U.S. Postal Service to deliver a DVD with a single first-class stamp. Netflix tested more than 200 mailing packages before discovering that it could effectively ship the product in a single package.%0D%0A%0D%0AGrowth Progression In December 1998, Netflix formed a partnership with Amazon.com Inc. The Netflix website directed customers interested in buying DVDs to Amazon.com, which in turn promoted Netflix on its high-traffic site. Despite Netflix’s popularity, in FY1999, the company reported losses of $29.8 million on revenues of only $5 million. In February 2000, Netflix developed CineMatch, a personalized recommendation system that compared customers’ rental patterns, looked for similarities, then used this information to recommend titles to people with similar profiles. (The algorithms driving CineMatch were continually updated. Recently, Netflix had offered $1 million for the person who developed the best new algorithm for CineMatch, which led to a 10 per cent increase in CineMatch’s recommendation ability.) In its first few years, Netflix incurred substantial losses, but its stated future goal was to move beyond DVD rentals to streaming video. By February 2002, Netflix had reached its target of 500,000 subscriptions and initiated an initial public offering in May 2002, at which it sold 5.5 million shares of common stock. In 2003, Netflix posted its first profit of $6.5 million on revenues of $272 million. The company also enjoyed a rapid increase in its subscriber base, from one million in the fourth quarter of 2002, to approximately 5.6 million in 2006, and nearly 14 million in March 2010. Netflix had the advantages of an early start in its business, a strong distribution system, customer loyalty, and patents for its software programs.7 Profit Model Netflix’s profit model relied on a “virtuous cycle” — that is, the more subscribers it had, the more content it could buy; and the more content it had, the more subscribers found the service attractive. Subscriber word of mouth led to new subscribers. The following information was from the Netflix investor relations site: Our primary competitive advantage is our large and growing subscriber base, which gives us tremendous operating efficiencies and, which we believe, drives the following virtuous cycles:  More subscribers means more money to license content, which drives more subscriber growth.  More subscribers means more word of mouth from subscribers to those who are not yet subscribers, which drives more subscriber growth.  [M]ore subscribers means we could increase R&D spend to improve our user experience, [which] drives more subscriber growth.8 As long as Netflix continued to grow its subscription base, and negotiated the best possible flat-fee deals for content (versus revenue sharing), the company would remain profitable. Customer churn and subscription-based (per user) licensing fees represented the main threats to the profit engine. Customer Intimacy Through the shrewd utilization of technology, Netflix had cultivated tremendous intimacy with its customers. The company had invested heavily in its operational backbone: its website technology. Invisible  to customers, a state-of-the-art system captured mass quantities of empirical data, amalgamated the given data points, applied germane analytics, and predicted customers’ desires. This complex system enabled Netflix to tailor its website for each subscriber to a “one-of-a-kind” experience that provided recommendations, requested ratings, offered customer reviews, and created unique, customer-specific genre names. The more information subscribers provided to Netflix, the more personalized their long-term experience — and Netflix reaped tremendous benefit through customers who were motivated to remain engaged. Moreover, Netflix’s information on customer preferences and purchasing trends enabled it to better its service, and to leverage suppliers and advertisers. Finally, Netflix deliberately targeted movie aficionados who saw value in the information provided by Netflix and by other like-minded subscribers in the Netflix-facilitated chat rooms. The virtuous cycle resulted in subscriber loyalty, and Netflix cemented this loyalty by making content available (often at lower costs than blockbuster movies). New Customers Many analysts wondered whether Netflix could leverage its data-mining capabilities to create the same level of engagement with its streaming customers, many of whom had a latent demand for watching popular TV serials in one go (i.e., TV “binging”), a formula successfully adopted by TV channels such as Nickelodeon. Netflix’s primary goal had never been to offer the latest content, and it focused instead on offbeat movies favoured by movie aficionados. Many felt Netflix was trying to adopt the same formula as “rerun TV.” A CHANGING WORLD BRINGS ABOUT NEW REALITIES Technological Progression: Antiquating the DVD All technologies were inevitably eventually antiquated by newer inventions. Just as the eight-track tape gave way to the cassette tape, the cassette tape to the compact disc, and the compact disc to the MP3 player, DVDs were losing out to streaming video. Advancements in data packaging and transfer led to the migration from the old DVD technology to new streaming services. Streaming services had previously been prone to interruptions and glitches, rendering them unreliable. Extremely large files, once too big to transfer virtually, needed to be saved on physical media and shipped by mail. Now, those files could be easily transferred to a small portable computing device such as a cellphone. Streaming data was more reliable than DVDs (it did not scratch or break), could be played anywhere (via mobile devices), and was far more responsive (received in real time). For all these reasons, writer Jan Ozer noted that Streaming media usage had grown exponentially over the past few years, both for entertainment purposes and as a vehicle for organizations to market, sell, and support their products and services, as well as for internal communications and training. For many such organizations, streaming video had transitioned from a “nice to have” curiosity to a mission critical technology.9 Hastings had known full well that streaming technology would eventually take flight and ultimately bring about the demise of the DVD. In his company’s annual reports, he had bluntly stated that streaming was invariably the future of the industry. Hastings knew that, as technology advanced, those qualities that once set his company apart from its competition would become nothing more than new requirements for entry.